Regulations & Strategies for

Corporate Governance
Introduction
The way that a company is run determines
the level of confidence that its
shareholders and other stakeholders will
have in it. A company with a strong
performance history will garner more trust
and in turn will likely reap financial
benefits. Investors will be more likely to
buy stock, the company will have an
easier time wooing top executives, and
partnerships will be quicker to form.
Sarbanes-Oxley Act
The Sarbanes-Oxley (SOX) Act was
passed in 2002 with the intention of
protecting investors and establishing
guidelines for financial reporting.
Investors and other interested
parties use a corporations financial
records and related information as a
method of evaluating the
corporation.
Sarbanes-Oxley Act
When the information is incomplete or
otherwise misrepresentative, those who
rely on the information are deceived.
Consequently, their ability to make sound
decisions will be impaired. The effects of
false information can be as dire for
accidental misrepresentation as they can
for purposeful deception. It is for this
reason that effective controls against both
error and corruption are vital.
Sarbanes-Oxley Act
In the most basic terms, SOX
requires that corporate executives
chief executive officers (CEOs) and
chief financial officers (CFOs)take
responsibility for the accuracy of
their corporations financial records
and for the processes of releasing
complete information to
shareholders.
Key Principles of SOX
Integrity
The SOX principle of integrity refers to the
completeness of the financial records; it
does not refer to a personality
characteristic. Investors use a corporations
financial information to obtain a picture of
the companys financial health. Should the
information be incomplete, investors will not
have a representative image of the
companys situation.
Key Principles of SOX
Reliability
As a principle of SOX, reliability is
the concept of accurate information.
The public and investors need to be
able to trust that the information with
which they are presented is correct.
Key Principles of SOX
Accountability
When looking at SOX, accountability refers
to the principle that within the corporation,
someone must be held accountable for the
establishment of controls and the
consequences should those controls fail.
Although SOX does provide some direction
for board members, it is the CEO and
CFO of the corporation who shoulder the
responsibility of complying with SOX.
SEC Regulations for
Shareholders Proposal
In most situations, shareholder
participation occurs through reading
quarterly reports, attending
shareholder meetings, and voting.
Shareholders are also able to offer
their own proposals and establish
advocacy committees to increase
their involvement.
SEC Regulations for
Shareholders Proposal
The 1934 Securities Exchange Act governs
the process by which shareholders are
able to submit proposals. This process is
outlined in Regulation 14a-8. According to
the 1998 amended version of the section,
shareholders are eligible to submit
proposals if they have held 1% of the
companys voting stock for a term of one
year or more. The guidelines also limit
shareholders to one proposal per meeting.
SEC Regulations for
Shareholders Proposal
Of course, these guidelines only regulate
the submission of proposals; it is up to the
board to determine if a proposal will be
put forward for vote. Even if the board is
unable to exclude a proposal, it can still
formally recommend that shareholders
vote against it. Directors are also able to
choose whether to act on a shareholder
proposal that has been agreed to by the
majority.
OECD
The Organization for Economic Co-
operation and Development (OECD)
offers membership for 30 countries
and has a relationship with over 70
others. Although perhaps best known
for its work with public corporations
and CG, the OECD is involved with
other economic areas, including
nongovernmental organizations.
OECD
The role played by the OECD is one of
research and guidance. The organization
facilitates policy discussion, generates
statistics, and publishes guidelines, such as
its Principles of Corporate Governance.
In 1999, the OECD released the first
edition of the OECD Principles of Corporate
Governance.1 Although geared toward the
organizations 30 member countries, this
document has also served as a global guide
for Corporate Governance efforts.
OECD
Although these guidelines do provide
specific recommendations and advice,
they are not necessarily designed for
direct implementation into a corporate
body.
Instead, these principles have been
created to serve as a starting point, a set
of regulations that evens the playing field
so that all countries start on the same
page with basic concepts of CG.
OECD
The countries are then left to
develop their own policies and
regulations that meet these
requirements, but in a manner
representative of their unique
corporate and economic structures.
OECD
The principles themselves focus on CG by
breaking it into five areas:
Framework. The OECD is a vocal
advocate of establishing a foundational
framework for Corporate Governance. This
framework should facilitate and coordinate
Corporate Governance efforts as well as
be cognizant of all relevant laws and
regulations.
OECD
Shareholder rights. Shareholders
are in the unique position of having
put up the capital for the company
but not having direct control over
how it is run. This means that their
investment in the company must be
protected, and their trust in the
system cannot be abused. This is a
key focus of Corporate Governance.
OECD
Stakeholder considerations.
Although stakeholders are not given
equal treatment in all corporate
frameworks, the OECD does support
fair treatment and consideration of
all company stakeholders.
OECD
Transparency. In sustaining the
rights of the shareholders, it is
important that corporations facilitate
truthful disclosure of information and
sufficient transparency in their
processes.
OECD
Responsibilities of the board.
As the shareholders representative
within the corporation, the OECD
recognizes its vital role in corporate
governance.
Cadbury Report
The Cadbury Commissions Financial
Aspects of Corporate Governance,
more commonly known as the
Cadbury Report, has made a strong
contribution to the process of
Corporate Governance in the United
Kingdom and has influenced CG
efforts around the world.
Cadbury Report
In general, the Cadbury Report
focuses on the importance of
establishing a strong and
independent board of directors. One
of the key components of doing so is
to separate the roles of the board
chairperson and the CEO.
Balanced Scorecard
The Balanced Scorecard strategy was
developed to simplify and streamline the
way in which a corporate executive thinks
about the corporations priorities and
obligations. In a sense, the Scorecard is
meant to provide the big-picture approach
so that the executive does not lose sight
of the goals when focusing on the details.
Balanced Scorecard
A further benefit of the Scorecard is that it
provides a concrete strategy for
evaluating intangible, non-financial
objectives.
There are four components of a Balanced
Scorecard:
Balanced Scorecard
Financial. The financial portion of the
Scorecard provides discussion of the cost-
revenue aspects of the project. This
section contains the financial figures for
the profitability of the strategy as well as
the potential for growth, costs per unit,
and share value impact.
Balanced Scorecard
Customer. The customer portion of the
Scorecard links the customer and market
activity to the financial success of the
strategy.
Organization. The organization
portion of the Scorecard recognizes
the actions that will have to occur on
the part of the corporation in order to
generate the market activity that will
support the financial outcome.
Balanced Scorecard
Development. Finally, the
development portion of the
Scorecard links the internal
development that will be required to
support the organizations efforts.
For example, this section may
include personnel expansions.
GCG Components
Strong ethical culture within the company
Effective communication among
shareholders, board members, and the
executive.
Viable relationship among all top-level
groups and committees.
Effective whistle-blowing policies and
protections in place.